Word of the Day: Unemployment (U3 and U6)

Time now for Word of the Day where we break down a financial term for our smart viewer but maybe not the financial expert. Today’s Word of the Day is unemployment.

Almost 2,400 people who received unemployment insurance in 2009 lived in households with annual incomes of $1 million or more, according to the Congressional Research Service. Unemployment insurance does not discriminate based on how much you make, but you may be surprised to learn how much unemployment statistics do discriminate based on official definitions of what it means to be technically jobless.

Let’s find out how the Bureau of Labor Statistics, which comes out with the official numbers each month, defines unemployment. An unemployed person is someone who is actively searching for, but is unable to find, work. The unemployment rate is the number of unemployed persons divided by the number of people in the labor force.

What constitutes actively searching? The BLS survey counts anyone who says they applied for work in the last 4 weeks. You have to have a permanent residence – so I guess when I was couch surfing early in my career – I wouldn’t have qualified to be surveyed.

And what about the labor force? To be considered part of the labor force you must be sixteen and older, non-active duty military or part of the prison population, and you must be employed or actively looking for work. So if you are a prison worker, you are not part of the labor force. You are just a magic, invisible GDP inflator.

What is not included the in labor force are the “marginally attached.” These are people who want and are available to work, but have not actively searched for a job in the past four weeks. This includes discouraged workers, or those who have stopped looking because they believe they can’t find work. So if you are homeless, and haven’t applied for a job in years, you are not factored into this unemployment equation

Now there are several different measures of unemployment calculated by the BLS ranging from U1 to U6 which parse different aspects of the unemployment situation. When you hear the unemployment rate mentioned, it is most likely referring to the U3 measure. This rate counts only unemployed workers who actively searched for a new job within the past 4 weeks. The other most used measure is the U6, which is not strictly a measure of unemployment because it groups the unemployed, along with the involuntarily part-time and the no-longer-looking. The U6 is the broadest measure of labor market agony we have. And this is what some call the more reflective measure of unemployment. It’s been around 15 percent for the past three years.

Do you already see problems with the meaning of the unemployment statistic? The often cited U3 does not include discouraged workers, so when the economy weakens unemployment increases. However if the economy goes further into recession, the unemployment rate may fall as more and more people become discouraged and leave the defined ‘labor force’. And in fact, a decline in the labor force contributed to a fall in unemployment in August. And the opposite is also true, as a recovery gets underway unemployment might spike as discouraged workers again start looking for jobs.

So for those of you who may have thought you are unemployed simply if you don’t have a job, now you know how much more complicated unemployment really is.